The Federal Defend Trade Secrets Act: Thoughts for Employers and Business Owners

Original article posted on the Marks Gray Blog on June 15, 2016, here.

In May 2016, President Obama signed into law the Defend Trade Secrets Act (DTSA or Act).  The Act brings the federal protection of trade secrets on par with corresponding laws that apply to the other pillars of intellectual property, copyrights, patents, and trademarks.

What is a trade secret –   The Act broadly defines “trade secret”:

(3) the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information;

18 U.S.C. § 1839(3)

What it does – The Act amends several sections of Title 18 of the United States Code and specifically section 1836 to allow a federal right to action for a party that claims to be the victim of trade secret misappropriation.   Prior to the passage of DTSA, the only federal remedy for the theft of trade secrets was a criminal action brought under the Economic Espionage Act of 1996 (EEA).  There were no federal civil remedies for misappropriations of trade secrets.  A Party could seek civil remedies in some states such as Florida, that adopted the Uniform Trade Secrets Act (UTSA) in 1988.[1]   However, not every state adopted the UTSA.

Protection for whistleblowers – The Act includes a provision to protect whistleblowers who reveal that a business is engaging in or has engaged in (knowingly or unknowingly) the misappropriation of trade secrets.  The whistleblower provision also grants immunity, on both the federal and state level, for the disclosure of a trade secret if the disclosure:

(A) is made

(i) In confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and;

(ii) Solely for the purpose of reporting or investigating a suspected violation of law; or

(B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

18 U.S.C. § 1833 as amended by § 7(b)(1) of DTSA.

Anti-retaliation provision – The Act has an anti-retaliation provision that is geared at stopping a business from retaliating against an employee who brings to light the business’s misappropriation of trade secrets.  Like the whistleblower immunity, but not as broad, the Act permits an employee, who is reporting an employer’s suspected violation of trade secret law, to disclose the trade secret to her attorney and use the trade secret information in related litigation.  However, the disclosure must be filed under seal and cannot be disclosed to third parties without a court order.[2]

Required notifications to employees – Under the DTSA, the two above-mentioned provisions, and the rights provided by them, must be communicated to the employee by the employer.  This notification provision of the Act extends to independent contractors as well.[3]  The Act provides that notice can be effectuated by inserting specific language into employee contracts (or agreements) or by inserting the language in the business’ policies and placing a cross-reference to the policy in revised employee and contractor contracts (or agreements).[4]

Lack of penalties –There are no express penalties for a business if it fails to comply with the notice requirements.  The Act does provide that, if an employer fails to comply with the notice requirement and does not communicate the anti-retaliation or whistleblower protection to its employees, the employer may not be awarded attorney’s fees or exemplary damages in an action for trade secret misappropriation against an employee.[5]

Ex parte seizures –The DTSA contains an ex parte seizure provision.  The ex parte seizure provision allows a party to seize the assets of a competitor if the party can show a court that there has been a misappropriation of a trade secret.  This type of injunctive relief will only be granted in extraordinary circumstances where a court clearly finds that granting the seizure outweighs the harm to the third party subject to the seizure.[6]  Accordingly, the party seeking the injunction has a high burden of proof before a court allows the seizure of another business’s assets.

What does this mean for you as an employer –